2. Identifying the Appropriate Business Model
Typically, offshoring models for IT services or business processes are either vendor-run operations or captive arrangements, in which a company opens up its own offshore subsidiary. However, because engineering is a core function, many more models are possible that give companies a bigger stake in the remote operations and more control over the R&D activities. Besides vendor and captive sites, other approaches include captive with staff augmentation resource (a company has its own remote engineering facility that employs some staff from outside vendors); closed JV (a joint venture that exists only to serve the client company); tripartite JV (a joint venture among three companies — the client, the outsourcer, and an engineering design firm); open JV (a joint venture that serves the client company as well as other outfits); BOT (build, operate, and transfer — a vendor builds, runs, and staffs the outsourcing operation for the client for a period of time before selling it to the company); and reverse BOT or R-BOT (the client builds, runs, and staffs the outsourcing operation for a period of time before selling it off to a vendor to continue to operate it).
Each model has its pros and cons. For example, although concerns about protecting intellectual capital can be allayed by choosing the captive or the closed JV model, the level of investment and management to oversee either of these arrangements is often significantly higher than a straight vendor-run approach. As a result, companies that choose vendor-run models often do so for strategic value, such as tapping into the outsourcer’s mechanical engineering skills or to get access to an emerging market. In those cases, to the greatest degree possible, the client company would likely allow only in-house personnel to access intellectual property.
3. Teaming Up with the Right Vendors
The capabilities of the engineering services company should matter even more than price in selecting outsourcing partners. A low bid by itself is a poor predictor of whether a vendor can actually meet the requirements of the project. Companies considering engineering outsourcing should do a capabilities assessment through a carefully designed request for quotation (RFQ) or request for proposal (RFP) that includes questions about the vendor’s expertise in supporting the engineering processes required in the project; the number of full-time employees and the skill sets they possess; employee attrition; the vendor’s business model, experience, and pricing structure; and the anticipated number of resources needed on-site at the client’s facilities to learn the culture and tasks and transfer them to the outsourcing location (if many people are needed to support this aspect of the venture, it could raise the cost of the project significantly).
In a perfect example of how not to put together an RFQ/RFP, a U.S.-based Tier One automotive supplier distributed a skimpy, single-page questionnaire to seven offshore and onshore engineering vendors. Because the company showed little eagerness to have the vendors detail their true capabilities in a uniform way so they could be compared with one another, the exploratory process had little value. As a result, incumbent onshore vendors that were well known to the client won the bid and offshore companies that were considered the top experts in the field were shut out.
But the RFP is just one step in picking the right vendor. Once the top five vendors are identified through the questionnaire process, a robust interviewing and negotiating effort must follow. Companies should closely review vendor presentations related directly to the job at hand, visit vendor sites at offshore locations, and have numerous rounds of discussion relating to process, task completion, price, and ability.